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September 4, 2012

Advisors & Gen X, Pt. 1: Retirement Planning and Wealth Transfers

The “Great Generational Wealth Transfer” has sparked a new conundrum for advisors. On the one hand, there is growing opportunity to capitalize on the massive $30 trillion asset transfer that will be expected from Boomers to their heirs over the next several decades. Since younger generations don’t typically have a lot of experience with managing large sums of money, they will probably be looking for assistance. On the other hand, there’s a tremendous amount of risk in losing assets under management. According to Kim Dellarocca, head of segment marketing and practice management at Pershing, “almost 90% of prospective heirs say they will move assets to another firm once they receive their inheritance.”

Why haven’t more firms prepared to manage this transfer knowing it was coming? The reason is usually not because they lack the desire to build relationships with the primary investor’s children, but more so because these generations are not easy ones to work with. Being a member of Generation X, I can vouch for my own and say that’s true.

The reason is simple: falling between the Boomer and Millennial generations, we may be experiencing a sort of middle-child syndrome. We graduated when the stock market and economy were doing relatively well, but have had little to get excited about since. We are accustomed to being “do it yourselfers” having grown up with no “formal” education around how to manage money, how to climb the corporate ladder or how to raise our families. Because of these and other factors, advisors need to work differently with Gen X’ers. They must relate to this generation’s ever-growing host of financial responsibilities, economic uncertainties and continually rising costs that only further cause cynicism about the market, retirement and working with financial professionals.

Our latest research report identified some roadblocks to retirement planning and investing that Gen X’ers currently face. Keeping these in mind when working with Generation X will help you appeal to their specific financial planning needs and turn these obstacles into opportunities:

Roadblock No. 1: They struggle with money management and also with competing priorities and are looking for an advisor who “gets them” and understands their challenges.

Gen X investors realize they need to be saving more but may lack the basic financial management skills needed to proactively plan for retirement and other long-term goals. Our research found that Gen X’ers between the ages of 30 and 44 scored significantly lower on our Financial Wellness Assessment in the area of basic money management than any other age group. Over 50% are uncomfortable with their debt, more than 40% are spending more than they make each month, and 60% don’t have an emergency fund. Some Gen X’ers face competing priorities in caring for both their children—the “boomerang generation”—and their aging parents, who need help because of less government and employer benefits to help supplement retirement and health care costs. They’re even opting to raid their retirement funds to pay for their children’s college education in many cases.

Obviously, as they inherit wealth and ultimately grow their own wealth, the members of this generation will not have these issues, but they will remember who was there to help them when they did. As natural skeptics, Gen X'ers are least likely to welcome a polished presentation about your capabilities after inheriting their parents’ assets, so if you want to keep these assets under management, it’s best to be a resource for them now so you’ll have a strong relationship by the time they need help managing their assets.

This is not to recommend you become a credit counselor, merely that you start the relationship early, include them in your meetings and conversations with their parents, and pass on tools, resources, and information that will help them manage their money and balance their many competing priorities.

Roadblock No. 2: They lack confidence and knowledge when it comes to investing, and don’t know where to begin or how to even evaluate their options. In the absence of a strong relationship with their parents’ advisor, we believe many will simply fire their parents’ advisor and try to go it alone when the time comes.

According to our research, 90% of employees between the ages of 30 and 44 are saving in their company sponsored retirement plan, yet only 15% said they knew they were on track to replace 80% of their income (or their goal) in retirement. While they said they have a general understanding of stocks, bonds and mutual funds, only 30% said they were confident that their investments were allocated appropriately. This could be the result of reading or hearing about saving and investing for retirement without getting the personal guidance on how to apply this knowledge to their individual circumstances.

Having low confidence in their investing decisions and around their ability to retire, coupled with troubled money management skills, makes this group particularly vulnerable to another potential economic downturn, and advisors should position themselves as the missing link. To do this effectively, advisors must start years before any transfers of wealth occur, taking the time in meetings with the entire family (and possibly over coffees and lunches with the adult children of their clients) to build Gen X investors’ trust by educating them on how the markets work, how to effectively allocate assets and build a portfolio that will weather the test of time, and how to evaluate individual investment opportunities.

In my next column, I’ll share some additional tips for how advisors can work more effectively with Gen X’ers. This generation will require more work upfront than the Boomers did, but it will pay off handsomely in gaining their trust and loyalty as clients down the road.